May 31 (Bloomberg) -- Short sales of U.S. homes rose to a
three-year high in the first quarter as banks agreed to let more
borrowers unload property at a loss, putting the transactions on
pace to surpass deals for foreclosures, RealtyTrac Inc. said.

Sales of homes in the pre-foreclosure process increased to
109,521, up 25 percent from a year earlier and the most since
the first three months of 2009, the Irvine, California-based
data service said today. Most of those transactions were short
sales, in which the lender agrees to a price that’s less than
the mortgage balance. The number of bank-owned homes sold during
the quarter fell 15 percent from a year earlier to 123,778.

“By next quarter nationwide, we’re actually going to see
the number of pre-foreclosure sales outnumbering bank-owned
sales,” Daren Blomquist, RealtyTrac’s vice president, said in a
telephone interview. “It’s a paradigm shift in the way lenders
are dealing with their distressed loans.”

Lenders are stepping up short sales to reduce losses, take
advantage of government incentives and avoid legal challenges to
foreclosures as they struggle with non-performing mortgages, he
said. The transactions, which peaked at 128,000 in the first
quarter of 2009, declined after President Barack Obama’s
administration pushed loan modifications to help borrowers keep
their houses, according to Blomquist.

Pre-foreclosure homes, or those that had received a default
or auction notice, sold for an average $175,461 in the first
quarter, with an average discount of 21 percent compared with
properties not facing seizure, RealtyTrac said. The average
discount was 16 percent a year earlier.

‘Aggressively Priced’

“Lenders are approving more aggressively priced short
sales, which in turn is resulting in more successful short-sale
transactions,” RealtyTrac Chief Executive Officer Brandon Moore
said in the report.

Homes that went through to foreclosure sold for an average
$147,995, or a 33 percent discount relative to non-distressed
properties. The median price of an existing home was $177,400 in
April, up from $164,800 in March, according to the National
Association of Realtors.

The five largest U.S. mortgage servicers, including Bank of
America Corp. and JPMorgan Chase & Co., agreed to pay $25
billion in February to settle allegations they wrongfully
repossessed homes. The deal, which requires banks to produce
evidence before seizing property from a delinquent borrower, was
expected to trigger a wave of foreclosures that hasn’t
materialized, Blomquist said.

“Instead of seeing 1 million properties being repossessed,
we’ll see more like 700,000 to 800,000 properties repossessed by
banks and an increase in short sales,” he said. “In effect,
homeowners are still losing their homes, but they’re doing it in
a more palatable way for them as well as for the market.”

Government Incentives

Under Obama’s Home Affordable Foreclosure Alternatives
program, known as HAFA, loan servicers receive as much as $2,000
for completing a short sale while borrowers who sell for a loss
can get as much as $3,000 to relocate. In March, the program
increased the maximum settlement for second-lien holders to
$8,500 from $6,000 and removed occupancy requirements for
servicers to receive government payments.

More than 39,000 short sales were completed under the
program through March, according to a May 4 Treasury Department
report.

JPMorgan completed 14,254 HAFA transactions, followed by
Bank of America’s 10,155 and Wells Fargo & Co.’s 7,640 as of
March 31, according to the report.

In the first quarter, pre-foreclosure sales made up 80
percent of distressed transactions in New York, followed by 67
percent in New Jersey, 60 percent in Idaho, 56 percent in
Colorado and 56 percent in Florida, RealtyTrac said.

California had 34,029 pre-foreclosure sales, the most of
any state, followed by 15,949 in Florida, 9,454 in Arizona,
6,126 in Georgia and 5,282 in Nevada.

Short sales increased in judicial states, such as Florida
and New York, where foreclosures require court approval, as well
as non-judicial states such as California and Georgia, according
to Blomquist.